Should You Lend Money to Family and Friends?

There are times when our friends or members of our family may fall on hard times and look to us for help. If the required assistance is of a sizeable financial nature, your relationship could be in jeopardy. For as much as you might feel obligated to help — or sincerely want to help — going down that road could very likely sour your relationship.

If They Ask to Borrow From You

Someone who knows you have money to spare and asks for a loan is probably hoping for a lower interest rate than they would receive from a bank (or no interest at all). Coming to you could also mean the bank has refused to give them a loan, which is a strong indication that they may default. Either way, even if you are paid back in full, a loan might introduce an element of resentment into your interactions — either you’ll resent them for using money that could be working for you, or they’ll resent you for requiring that they pay you back.

An exception to the rule may be a loan to a business-savvy individual that will increase the amount of capital available for a venture likely to be profitable for both of you. This is a gamble, so just be sure you both understand the risks, and that you don’t loan more money than you can afford to lose.

If They Ask You to Borrow for Them

There may come a time when a friend or relative is neck-deep in debt and their credit is so bad that they can’t get a loan. An individual in such dire straits might approach you with an emotional appeal. If you don’t have the money they need, they may ask you to take out a loan for them and promise to make payments to you. Under no circumstances should you agree to this!

A likely outcome in this situation is that the money will be squandered and you’ll be left holding the bag. If you don’t have sufficient funds to pay back the loan, your credit could take a big hit.

Your Financial Health Is More Important Than the Relationship

This isn’t heartless. It’s true. Pulling someone out of a financial sinkhole can take years. Depending on the enormity of the person’s debt, filling in the hole may require major lifestyle changes on your part. This is especially true if you take out a loan on their behalf. Expect to make compromises in major aspects of your life, including your plans for the future.

What You Can Offer

If you can afford it, and would like to, you can give money as a gift. Keep in mind that the annual federal gift tax exclusion is $14,000. You’ll have to report any more than that, and it will be deducted from your lifetime gift tax exclusion.

Only give as much as you’re willing to part with. It is a gift, after all. So, be careful that you’re not enabling someone’s irresponsible behavior or they may keep asking for more. If you refuse this person and your interactions go sideways, don’t feel guilty for refusing to risk your own financial security.

Even if it’s less than what is necessary to rescue someone from a bad financial situation, your support is sure to be greatly appreciated — especially when it doesn’t come with a payback stipulation.

If lending or giving money is not an option, there may be other ways to lighten their financial load. Perhaps you can help them find a better-paying job. Or, use your skills to take care of car or household repairs that they can’t afford to make.

It might feel cruel to refuse to lend your friends or family members money, but in the long run, it may be the best decision you can make. Just remember, money isn’t necessarily the only way you can help them solve their problems.